Twisted path to green: strategic regulatory spillovers in global competitive markets

Regulatory compliance in high-standard markets can influence environmental performance beyond their jurisdiction through regulatory spill-overs, whereby manufacturers voluntarily adopt the high standard in unregulated markets. We examine how such spill-overs can be strategically induced through the design of green entry requirements. We develop a game-theoretic model in which competing manufacturers sell to both a high-standard and a low-standard market. The high-standard regulator unilaterally sets a minimum green requirement for product entry, and manufacturers choose whether to unify their product lines or differentiate them across markets. We characterise manufacturers’ equilibrium strategies and identify conditions under which spill-overs occur, showing that they can arise even when only one manufacturer unifies its product line. We then derive the regulator’s optimal policy and uncover a non-monotonic pattern. As the fixed cost of maintaining an additional low-standard line increases, the regulator’s optimal green requirement may shift from inducing no spill-over to complete spill-over through a substantial relaxation of the requirement, and then back to partial spill-over by raising it again. Finally, we examine the role of industrial structure and show that when the domestic industry is advantaged, incorporating manufacturers’ profit further strengthens the regulator’s incentive to induce spill-overs.